Lending Standards Remain Tight. Weak Consumer Demand to Stall Recovery?

Banks were still tightening loan standards and consumer demand for loans remained soft during the second quarter, a central bank survey showed yesterday.

“Domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households,” the Federal  Reserve’s survey of senior loan officers said.

Major loans include commercial and industrial loans, commercial and residential mortgages, and consumer loans.

In the the residential prime mortgages category 22% of banks reported tighter lending terms. In the commercial mortgage sector 46% of banks tightened credit. Business and consumer lending fell in the middle, with further tightening reported by about 35% of lending institutions. Although banks are still reluctant to lend, relative to the Jan-April survey, all categories showed improvements.

Only one category reported greater demand in the month, and that was for prime mortgages ― home loans that require the highest credit quality. Demand for all other loan categories was still declining, albeit the pace of declines is diminishing in the business sector and was mostly unchanged in commercial mortgages.

The biggest demand disappointment in the report was consumer demand for credit, especially given the importance of the consumer in sustaining a recovery. Consumer credit demand declined at a faster pace than reported in April.

Looking ahead, the Fed said most banks plan to keep lending standards tighter than average levels over the past decade, but that should be expected given the reputation lenders made for themselves leading up to the subprime crisis.

LaVorgna commented: “We will become more bullish on the pace of the recovery if loan demand firms or lending standards ease. Until then, expect a muted, sub-par return to growth.”